SEC Proposes Elimination of Trading Rules That Block Tokenized Securities on DeFi Platforms

Key Highlights

• The Securities and Exchange Commission has put forward a proposal to eliminate Rules 611 and 610(e) from Regulation NMS, regulations that have shaped equity trading in the United States since 2005
• Rule 611 prohibits executing trades at inferior prices compared to the best available market quote; Rule 610(e) restricts locked or crossed quotations
• Alex Thorn from Galaxy Digital characterized this development as “one of the biggest unlocks yet” for tokenized equity trading within decentralized finance
• The structural design of automated market makers makes legal compliance with these regulations impossible, effectively barring tokenized American stocks from decentralized trading venues
• Final implementation of the regulatory change is anticipated in Q1 2027, though temporary exemptions for tokenization pilot programs may arrive earlier

The Securities and Exchange Commission has unveiled a proposal to dismantle two established stock market regulations that industry analysts argue have prevented tokenized American equities from operating on decentralized finance platforms.

These regulations — identified as 611 and 610(e) within Regulation NMS — were established in 2005. Rule 611 prevents trade execution at prices inferior to the optimal available quote across any trading venue. Rule 610(e) prohibits market venues from displaying quotations that lock or cross against quotes on competing platforms.

Chairman Paul Atkins of the SEC stated the proposal aims to “simplify market structure and reduce costs for market participants while allowing competition, innovation, and other market forces to shape the continuing evolution of our equity markets.”

The public commentary period of 60 days has commenced.

Implications for Decentralized Finance

Alex Thorn, serving as head of research at Galaxy Digital, outlined why these regulations represented an insurmountable obstacle for tokenized equity trading within cryptocurrency markets.

Automated market makers — the algorithmic systems driving decentralized exchanges — function by executing transactions against liquidity pools at current pool-determined prices. These systems lack the capability to query Nasdaq pricing. They cannot suspend a transaction due to superior pricing availability elsewhere. Under the framework of Rule 611, every transaction becomes a regulatory violation.

“Any pool in a tokenized NMS stock would commit trade-throughs constantly and arguably be an illegal trading center,” Thorn explained.

Rule 610(e) presented identical challenges. AMMs perpetually adjust pricing based on transaction flow, resulting in quotes that would regularly lock or cross the National Best Bid and Offer — activity that current regulations mandate exchanges prevent.

Future Developments

Should the regulations be eliminated, the SEC is anticipated to depend on a “best execution” framework under FINRA Rule 5310 instead. This approach is principles-oriented and applies at the broker level, making it compatible with AMM operational models.

Jaret Seiberg, who serves as managing director at TD Cowen’s Washington Research Group, indicated the proposal will likely receive approval. The rule is expected to reach finalization during Q1 2027.

However, Seiberg suggested that tokenization pilot projects may not face delays until that date. He anticipates the SEC will grant early-stage tokenization initiatives exemptive relief from Rule 611 prior to official repeal.

This regulatory proposal forms part of the SEC’s comprehensive “Project Crypto” initiative, introduced in August 2025, designed to establish more definitive regulations for digital assets and blockchain technology within American markets.

Thorn observed that additional obstacles persist, including exchange registration requirements, clearance and settlement protocols, and regulations not designed for decentralized trading environments. He indicated these matters may be resolved through an upcoming SEC “innovation exemption.”

The SEC had previously planned to unveil a tokenized stock trading framework last month but postponed the release following objections from stock exchanges regarding execution concerns.